Clean Energy Finance

Challenges and Opportunities of

Early-Stage Energy Investing

National Renewable Energy Laboratory

Industry Growth Forum
December 3 – 4, 2013
Golden, Colorado
NREL/PR-6A50-60882-1
Clean Energy Finance
Challenges and Opportunities of Early-Stage Energy Investing
Vision and guidance for this effort was provided by Niccolo Aieta and Richard Adams of the National
Renewable Energy Laboratory. The paper was authored by JISEA researchers David Heap and Jacquelyn Pless
under the supervision of Morgan Bazilian and Doug Arent.

Supporting organizations include:

NREL Industry Growth Forum
The premier event for clean energy startups to maximize their exposure to receptive venture capital,
corporate investors, and strategic partners.

Joint Institute for Strategic Energy Analysis

Providing leading-edge, objective, high-impact research and analysis to guide global energy investment
and policy decisions.

Colorado Center for Renewable Energy Economic Development

A catalyst for economic development in Colorado through clean energy and energy efficiency
innovation and entrepreneurship.

Wells Fargo Bank

A provider of banking, mortgage, investing, credit card, insurance, and consumer and commercial
financial services.

EY
EY’s Global Cleantech Center offers a worldwide team of professionals in assurance, tax, transaction
and advisory services who understand the business dynamics of cleantech.

Disclaimer: the analysis and recommendations presented are solely those of the researchers mentioned and do not represent the opinions of
the National Renewable Energy Laboratory, the Joint Institute of Strategic Energy Analysis, or the Colorado Center for Renewable Energy
Economic Development. All referenced sources are available publicly. Interview commentary was obtained with the consent of
participating interviewees.

Clean Energy Finance–Challenges and Opportunities of Early-Stage Energy Investing 2

 Contents
 Overview
 Clean Energy Investment Current Situation
 Investment Classes and Stages
 Challenges
 Solar PV Market Analysis
 Industry Comparisons
 Investor Insights
 Opportunities
 Conclusion.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 3

 Overview
Characterized by a changing landscape and new opportunities, today’s
increasingly complex energy decision space will need innovative financing
and investment models to appropriately assess risk and profitability.
This report provides an overview of the current state of clean energy finance
across the entire spectrum with a focus on early-stage investing, and it
includes insights from investors across all investment classes.
Further, this report aims to provide a roadmap with the mechanisms,
limitations, and considerations involved in making successful investments by
identifying risks, challenges, and opportunities in the clean energy sector.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 4

 Clean Energy
The term Clean Energy (CE) is used throughout this paper, encompassing multiple
energy subsectors including renewable energy, energy storage, energy efficiency,
smart grid, biofuels, and systems integration technologies.

In addition to the references cited in the main text of this paper we also found the
following useful: Olmos 2012; Delina 2011; Hesser 2013; Bhattacharyya 2013; Sadorsky
2012; Gujba 2012; Wüstenhagen 2012; Masini 2012; Kann 2009; Managi 2013; Hofman
2012; Nelson 2013; Aguilar 2010; Kayser 2013; Mills 2010; Saunders 2012; Mills 1991;
Abhyankar 2012; Pollio 1998; Bond 1995; Giebel 2011; Money Matters 2005; Fatemi
2013; The Energy Finance Handbook 1995; Olmos 2012.

Full references are provided on pages 57 to 61.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 5

Clean Energy Investing
Key Observations
Clean energy investors today face an increasingly complex decision space, needing to consider
economic and policy realities and multiple developmental risks such as technology, market, and
team risk.

Global investment in renewable power and fuels was $244 billion in 2012. Although this was a 12%
decrease from 2011’s record $279 billion, 2012’s total was still the second-highest ever (8% higher
than 2010) (UNEP/BNEF, 2013).

Global investment by venture capital and private equity investors fell 30% in 2012 relative to 2011
(to $4 billion)—the lowest since 2005. Investment in specialist renewable energy companies by
public market investors also dropped to $4 billion (61%) (UNEP/BNEF, 2013).

A large proportion of recent clean energy investment has been driven by growth in emerging
markets, particularly in China. There was a shift in activity from developed, to developing,
economies (UNEP/BNEF, 2013).

Solar photovoltaic technology has experienced a significant reduction in costs from 2011 to 2012.
This decline contributed to an 11% fall in the dollar value of overall solar investment even though
capacity installed increased significantly; indeed, 2012 marked a record year for PV capacity
installed at 30.5 GW (UNEP/BNEF, 2013).

Policy uncertainty was a major contributor to a decline in investment in the United States, which
was down 34% to $36 billion in 2012 (UNEP/BNEF, 2013).

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 6

Clean Energy Investing
Key Insights
Funding gaps in technology innovation between the angel and venture capital
investment stages, as well as in the growth stage between the pilot project phase of
development and full-scale commercialization, have resulted from decreased venture
capital investments.

CE is frequently compared to the investment cycle for IT, but it relates more
accurately to the chemical industry. Energy and chemicals are both commodity
markets with strong incumbent players and high cost of capital for project and
technology development.

Challenges to CE investment range from economic and policy obstacles to

development risks such as technology, market, and team.

Opportunities to increase early-stage investing include improved government

policies, partnerships, business model innovation, and multiple financing mechanisms
including program related investments, efficient government loan and grant
awarding, crowdsourcing, and efficacy insurance.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 7

  Overview
 Clean Energy Investment Current Situation
 Investment Classes and Stages
 Challenges
 Solar PV Market Analysis
 Industry Comparisons
 Investor Insights
 Opportunities
 Conclusion.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 8

Complex Decision Space

Today’s energy decision

space is increasingly complex,
characterized by:

Changing priorities
Energy reliability and
resiliency concerns
Energy security
considerations
Quality of life requirements
Water and food security
implications
Global market implications
Increased access to
economically viable natural
gas resources
Changing economics of
renewables
Policy uncertainty
Investors today face an increasingly complex energy decision Environmental concerns
space; innovative models are needed to assess risk and Aging infrastructure.
profitability.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 9

Global Investment

Global New Investment in Renewable Energy By Asset Class,

2004-2011, $bn

Globally, there has

been
China was a thecontinued
upward
dominant trend
country in in
clean energy
2012 for renewable
energy investment,Since
investment.
mostly attributed to
2004, RE investment
a significant jump in
has
solar been resilient,
investment.
with
There wereexpansion
also even
through
sharp increasesthein 2008-
2009 recession
other emerging
economies,
(UNEP/BNEF,such as 2012).
South Africa, Mexico,
Chile, Kenya, and
Morocco
(UNEP/BNEF, 2013).

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 10

Clean Energy Investment
New Investment by Technology ($bn)

Investment in renewable power and fuels was

$244 billion in 2012 (down 12% from 2011’s
record figure of $279 billion), representing
declines in all renewable sectors except for
small-scale hydropower and ocean energy
(BNEF, 2013a). 2012 still marked the second-
highest year ever, up 8% from 2010
(UNEP/BNEF, 2013). However, global new
investment in Q1 2013 was down 36% ($40
billion) relative to Q4 2012 (the lowest level of
any quarter since Q1 2009) (REN21, 2013).
Solar was the leading sector in terms of
money committed in 2012, accounting for
more than 57% of total new investment in
renewable energy in 2012 and totaling $140.4
billion (REN21, 2013). This was driven by falling
PV costs, where the “China” price for a
multicrystalline module was $0.78 per Watt in
December compared to $0.93 in January
(BNEF, 2012).
Wind investment—coming in second—totaled
$80.3 billion (about 33% of the total) in 2012
(REN21, 2013). The remaining 10% of
renewable energy investment in 2012 was
made in bio-power, waste-to-energy, small-
scale hydropower, biofuels, geothermal, and
ocean energy.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 11

Global Investment

Top 15 Countries for New Investment in Clean Energy in 2012 and

% Change on 2011 ($bn)

 China was the China 65.13 20%

dominant country
in 2012 for United States 35.58 -37%
renewable Germany 22.80 -27%
energy
Japan 16.28 75%
investment, which
was mostly Italy 14.71 -51%
attributed to a
United Kingdom 8.34 -17%
significant jump in
solar investment India 6.85 -45%
(UNEP/BNEF,
Australia 6.19 40%
2013).
South Africa 5.46 20563%
 There were also Brazil 5.34 -32%
sharp increases in
other emerging Canada 4.41 -23%
economies, such France 4.31 -34%
as South Africa,
Mexico, Chile, Belgium 4.05 11%
Kenya, and Greece 3.42 179%
Morocco
(UNEP/BNEF, Spain 2.95 -68%
2013).
Note: excludes corporate and government R&D. Source: Bloomberg New Energy Finance

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 12

Investment Shifting to Developing Economies

Cumulative Power System Investment 2012-2035 Estimated at USD 16.9 Trillion

Non-OECD countries account for 60% of cumulative investment.

Total Investment in Clean Energy by Region, 2007-2011 ($bn)

In 2012, there was

a further shift of
investment from
developed
economies to
developing
economies. Total
investment was
down 29% at $132
billion while it was
up 19% at $112
billion in developing
economies (the
highest ever)
(UNEP/BNEF, 2013).

IEA WEO, 2012; BNEF, 2011

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 13

U.S. Natural Gas ‘Revolution’

Unconventional natural gas has transformed the domestic

energy outlook:
Total natural gas production from 2011 through 2040 is
projected to grow 44%, mostly driven by increased shale gas,
tight gas, and coalbed methane development (growing by
113%, 25%, and 24%, respectively).
EIA expects the share of total production from shale gas to
increase to 50% in 2040 from 34% in 2011.
Natural gas prices have declined significantly; however,
lower prices also lead to less drilling and lower production,
placing some upward pressure on prices.

Source: EIA Annual Energy Outlook 2013 with Projections to 2040

Source: Presentation by EIA Administrator

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 14

U.S. Investment Declining
Asset Finance of Renewable Energy Assets by
Country, 2012, and Growth on 2011, $bn

• While some regions are

experiencing increases in
investment, total CE
investment in the United
States is declining.

• According to Ernst & Young

(2012), the United States’
New Private Sector Investment in Renewable Energy by
share of global PE/VC Country and Asset Class, 2012, and Growth on 2011, $bn
investment in cleantech
companies declined to 50%
in 2011 compared to 60% in
2010.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 15

U.S. Investment Declining

Global New Investment in Renewable Energy by Region, 2004-2012, $bn

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 16

  Overview
 Clean Energy Investment Current Situation
 Investment Classes and Stages
 Challenges
 Solar PV Market Analysis
 Industry Comparisons
 Investor Insights
 Opportunities
 Conclusion.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 17

Investment Classes in Early-Stage Energy Investing
• Wealthy individuals who provide financial capital for startup companies in
exchange for equity.
Angel Investors • Organize into networks or groups through which they collectively vet promising
technologies and decrease risk.
• Commonly one of the first sources of outside investment in a startup.

Venture Capitalists • Structured partnerships with hired managing members (general partners).
• Raise money from large investors or wealthy individuals (limited partners) and
identify companies in which to invest around a predetermined investment thesis.
(VCs) • Focus on specific industries, and invest in emerging companies that offer the
potential to provide significant financial returns.
• Also offer management expertise and industry connections.

Corporate VCs • Venture arms of established companies.

• Offer additional benefits beyond financial capital: industry expertise, supply chain
knowledge, manufacturing capacity, brand marketing.

Corporate • Large corporations seeking to leverage technical innovation with core strengths.

Strategic Partners • Long time horizon and cash flow to allow technology to mature.

• Post-VC and pre-public markets.

Private Equity • Involved in growth stages, leveraged buyouts (LBOs), and taking companies to
and through the IPO process.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 18

The Changing Role of Venture Capital
• Venture capital has typically existed in the form of high-risk capital provided by VC/PE New Investment in Renewable Energy by Stage,
institutions or wealthy families to aid early-stage businesses. Such capital is often 2004-2012, $bn
provided when there is no other viable source.

• VC firms seek new companies with significant growth potential and help these
companies succeed through not just cash investments, but also sharing management
and technology expertise, networking, and helping with other tasks (US PREF, 2010).
VC firms are selective---typically choosing only 1% of business plans they evaluate,
and consider closely the technology, business model, management team, potential
market size, capital requirements, required time to scale, and more (US PREF 2010).
Further, many firms take on “follow-on” investments as the company grows, investing
millions more over the lifetime of a company if it’s successful. VC firms can also pool
their resources together so that multiple firms invest in a company simultaneously (US
PREF, 2010).

• Venture capital also plays a critical role in economic growth, especially in the United
States (US PREF, 2010). Over roughly the last three decades, the U.S. VC industry has
invested about $465 billion in approximately 27,000 companies – including companies
that are now industry leaders such as Apple, Google, Amazon, and eBay (US PREF,
2010). New industries—such as information technology—have been supported, and in
2008, U.S. companies once supported by VCs employed roughly 12 million people, Source: (UNEP/BNEF 2013)

making up about 11% of the private sector and generating $3 trillion in revenue VC New investment in RE by Sector (2004 to 2012 $bn)
(about 21% of U.S. GDP that year) (US PREF, 2010).

• Investing opportunities fluctuate over time, shifting from sector to sector as industries
mature—in recent years, industries such as telecommunications and information
technology matured, allowing for increased venture capital investments in energy (US
PREF, 2010).

• Venture capital investment in emerging U.S. renewable energy companies grew

significantly in the late 2000s. Around 2005, the renewable energy sector only
accounted for less than 2% of total VC investment in U.S. companies, but this figure
jumped to 6% in 2006, 9% in 2007, and 15% in 2008 (US PREF, 2010). Out of $28 billion of
total VC investment, more than $4 billion of total U.S. VC investment was invested in
U.S. renewable energy companies in 2008 (NVCA/PwC).

• As illustrated on the right, VC investment in renewable energy has been declining

since 2010. The next two pages provide more detail on this trend.
Source: (UNEP/BNEF, 2013)

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 19

VC Funding Trends
Globally, venture capital and private equity (VC/PE) investment in renewable energy fell to $3.6
Clean Energy Funding Trends by Quarter 2010-2013
billion (30%) in 2012, which represents the lowest year since 2005. Such a decline reflects the difficulty
of achieving adequate exits and a generally dampened investor appetite (UNEP/BNEF, 2013). Of this
decline, 75% was in private equity expansion capital, while most of the rest was due to early-stage
venture capital (down $300 million to $530 million). However, late-stage VC remained steady at $1.7
billion (down just slightly from $1.8 billion) (UNEP/BNEF, 2013). Contrary to the trend, seed funding—the
earliest stage of VC—experienced a 145% increase relative to the previous year, and Series C
funding rose 21%.

The decline in 2012 came as VC/PE investors faced bleak economic conditions and unattractive
trading conditions for renewable energy stocks. Overcapacity, declines in product prices, continued
policy uncertainty (particularly in the United States), and decreases in production subsidies in Europe
contributed to this trend (UNEP/BNEF, 2013). At the same time, VC/PE investment across the economy
as a whole—the aggregate value of all deals across every industry worldwide—fell 22% to $39 billion
(UNEP/BNEF, 2013).

So far in 2013, clean energy and energy efficiency venture capital and private equity investments
have declined significantly, totaling 68 venture capital and private equity investments in Q2 2013
(worth $1.3 billion) down from 86 deals in Q1 2013 that totaled $2.4 billion. The decline in Q2 2013 was
most significant in early-stage venture capital, where there were 19 series A, B, and seed investments
2013 Second Quarter Sequential Growth Factors (Q/Q Growth)
compared with 40 in the previous three months (BNEF, 2013). This totaled only $86 million, the lowest
volume since BNEF started recording such figures in 2004. Late-stage venture capital was also down
but not so significantly (totaling $519 million, which was 25% below the four-quarter average (BNEF,
2013)). However, Q2 2013’s investment was only marginally below 2012’s quarterly average of $1.4
billion (BNEF, 2013). Private equity expansion capital for clean energy companies was also lower in
Q2 2013 than Q1 at $653 million (41% less than the first quarter). However, this was actually relatively
robust more generally as it was higher than the quarterly average for all of 2012 (BNEF, 2013).

Growth in Cleantech Funding Compared with Total Venture Funding

Clean Energy Funding by Stage Each Quarter, 2010-2013

Source: PwC, 2013

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 20

VC Funding Trends
Declines in 2013 contradict the typical trend across all
industries. Market watchers generally agree that venture
investment increased across all industries in Q2 2013 The broader picture is more positive according to BNEF. The U.S. National Venture
(Preqin recorded a 14% increase in the global value of Capital Association notes there were 21 venture-backed IPOs in the United States in Q2
venture deals and Pitchbook notes a 12.5% 2013, raising $2.1 billion—more than double the volume and dollars seen in the first
improvement in the U.S. market) (BNEF, 2013). quarter.
Further, first-time funding in renewable energy
decreased 95% to $3 million in Q2 2013 relative to Q2
VC/PE New Investment in RE by Region,
2012. PwC reports that early-stage investment was just VC/PE New Investment in RE by Stage, and
2012, and Growth on 2011 $bn
$52 million during Q2 2013, a decrease of 69% relative to Growth on 2011, $bn
a year prior, while cleantech investment for late-stage
opportunities decreased by 59% to $312 million. Early-
stage average deal size decreased 56% and late-stage
average deal size decreased 50% over the same time
period (PwC, 2013).

BNEF notes that trends reflect investor wariness of clean

energy (BNEF, 2013). For instance, VantagePoint Capital
Partners abandoned fundraising for a new $1.25 billion
clean-tech fund earlier this year citing insufficient
interest from limited partners. Others such as Draper
Fisher, Silver Lake, NEA, and more have also pulled back
from the sector (BNEF, 2013). One cited reason for
investors being wary of the sector is a lack of exit
opportunities (BNEF, 2013).

VC/PE New Investment in Renewable Energy by VC/PE, Public Markets, and Asset Finance
VC/PE New Investment in RE by Region, Investment in Renewable Energy in the United
Sector, 2012, and Growth on 2011, $bn
2004-2012, $bn States by Sector, 2012, $bn

Source: UNEP/BNEF, 2013.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 21

Technology Investing Stages + Funding Gaps
The Classic Investment Stage Progression for Technology Investing, Including Funding Sources and Development
Processes/Activities (IRENA, 2013; UNEP, 2013)

Technology
Process Technology Research Manufacturing Rollout (project finance)
Development
Activity Basic R&D Applied R&D Demonstration Market Development Commercial Diffusion

Government and Angel

Funding Source University Labs Investment
Venture Capital Private Equity

There is now a funding gap between the angel investment round of funding and that of venture capital (the
technology “valley of death”). Where venture capitalists typically would fund a Series B round, many have
opted to move down the continuum to a later stage with less risk (Rosen, 2013). There is an additional funding
gap in the growth stage (the commercialization “valley of death” or “debt-equity gap”) as the capital
requirements for commercializing CE technologies is beyond the risk tolerance and timelines of most existing
debt and equity markets (BNEF, 2010).

Process Technology Research Technology Development Manufacturing Rollout (project finance)

Basic Market Development Commercial

Activity Applied R&D Demonstration
R&D (Scale-up) Diffusion
Government Technology
Commercialization
Funding Source and University Angel Valley of Venture Capital Valley of Death
Private Equity
Labs Death

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 22

  Overview
 Clean Energy Investment Current Situation
 Investment Classes and Stages
 Challenges
 Solar PV Market Analysis
 Industry Comparisons
 Investor Insights
 Opportunities
 Conclusion.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 23

Barriers for Early-Stage Clean Energy Investors

Overview
Economic Conditions: Wider economic problems have had an impact on investment since 2008,
despite growth, and they remain a threat (UNEP/BNEF, 2013). The euro area sovereign debt crisis
started to impact the supply of debt for renewable energy projects in Europe, as well as increased
cost of funding and upgraded risk assessments involved in lending to borrowers abroad. Natural gas
prices also affect the attractiveness of CE investments.

Policy Complexity: Policy affects market demand, which in turn affects technological innovation. In
the United States, Congressional support for clean energy and a price on carbon has ebbed in the
face of low natural gas prices and new concerns about the cost of renewable energy support
(UNEP/BNEF, 2013). However, state policy tends to drive local clean energy markets given the lack of
federal movement in this area. Direct financial incentives can help make a project more
economically attractive, while a Renewable Energy Portfolio Standard (RPS) may reflect a
hospitable market and support. Nonetheless, policy environments and actions to either remove or
create new ones are highly uncertain and often volatile. Further, regulatory uncertainty (access to
the grid) can drive feasibility. This uncertainty increases investor risk.

Development Risks: For any technology to proceed through investment stages, it must have three
components: solid technological advantage, a market for the technology, and a talented team to
commercialize it. The challenges to CE development in each of these areas are unique.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 24

Policy Complexity

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 25

Policy Complexity

Policy regime instability was the main issue

dampening investment in 2012 in important
developed economy markets (UNEP/BNEF, 2012).

Government support in the United States is

complicated by a complex framework of varying
state incentives, which can easily be changed or
repealed depending upon the political winds. For
example, of the 30 states to have RPS, eight
considered legislation to repeal them in the
summer of 2013 (Midwest Energy News, 2013).

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 26

Policy Complexity
Tax Credits for Renewables

In addition to a complex web of varying state

credits, the federal Production Tax Credit (PTC)
and Investment Tax Credit (ITC) have gone
through a repeating cycle of extensions, with
credit horizons being different for different
forms of generation. Whereas both wind and
solar have a PTC of 2.3¢/kWh, wind projects
will have the ITC of 30% until the end of 2013
(AWEA, 2013), and solar projects have the 30%
ITC through to 2016 (SEIA, 2013).

Source: DSIRE, 2013

U.S. Wind Annual Capacity Additions (GW)

Investors prefer to base investment decisions

on longer-term policy. The PTC in particular has
affected U.S. wind power development from
1999 to 2013. Investor confidence in policy
allows for increased investment, as can be
seen starting in 2005 through to 2010, and then
in the decrease in investment as the policy
future became uncertain in 2010.

Source: AWEA, 2013

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 27

Development Risks - Technology
With a few notable exceptions, technology development in the clean energy space is
complex, time-consuming, and capital intensive. Key challenges to technology development
include:
The incumbent utility industry has had public support for over 100 years, and therefore had
time to perfect their business model.
Unlike most consumer products that are tangible and with which consumers can clearly
evaluate the benefits, the realities of “clean” versus “dirty” power can’t be distinguished. Home
and building occupants simply expect the lights to come on.
Environmental stewardship is mostly a public initiative, and private investors are incapable of
reaping all the returns that an innovative technology might offer (CEG, 2013).

Scalable and
benefit from Profitable without
economies of subsidies
Technology risk can include scale
performance of the technology,
potential equipment defects,
financial strength of the
manufacturer, and future Significantly
technological change (GCPF & better than the
Supply a large
incumbent(s) (i.e.
DB, 2012). faster, cheaper, Critical
market
etc.) success
factors for
new
technologies

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 28

Development Risks - Market
When the cost of per installed MW of clean energy is still often higher than that of conventional energy production, risk is incurred, and investors consider
the potential returns on investment. Clean energy related products and services mainly sell into highly regulated and entrenched marketplaces, such as
power generation markets, commodity chemicals, or energy efficiency products. The returns and investment horizons of clean energy are fundamentally
different from other industries. For instance, returns on software focused funds that closed before the early 2000's dot.com crash routinely saw 10X returns.
These historical success stories are not prominent in clean energy's history. In fact, stemming from this dot.com crash, many of the funds that were still open
were looking at a very bleak exit market for software companies and began to search elsewhere for places to allocate the funds. This led to an “unnatural
bubble” of investment from about 2004 to about 2010. This last-ditch-effort strategy was bound to produce many more failures than successes, and it did,
creating part of the current reluctance to invest in clean energy.

Although the general perception is that returns must be sacrificed when investing in clean energy, some argue that investors are now placing a greater
premium on reducing overall volatility in their portfolios considering the wide swings in equity markets since the turn of the millennium. Thus, investors pursue
different risk reduction strategies. While one approach is to reduce risk assets in a portfolio, another is to find ways to account for a broader spectrum of risks
relevant to invested assets. A sustainability focus in investment portfolios can help address concerns about volatility and risk, but many investors still question
performance results (assuming a returns trade-off for a focus on sustainability) (UBS, 2013).

However, although some sustainability-oriented funds have indeed generated mixed performance results, this also holds true for any active investment
approach (UBS, 2013). Sustainable investing strategies perform approximately in line with mainstream benchmarks (UBS, 2013). Actively managed portfolios
should diverge from the benchmark in proportion to the risk taken, and active funds are expected to underperform by investment costs, on average.

In addition, sustainable investing isn’t always just about risk

reduction—some investments are indeed more risky and
Thematic Funds Offer Different Risk/Return Profile
require a more sophisticated fund holder. Thematic portfolios,
for instance, are less well-diversified than broader portfolios
since they focus on specific types of companies.

This figure shows that investors in the S&P Global Clean Energy
Index indeed “sacrificed” returns, but this was because of the
risks associated with the limited number of companies
available to provide exposure to the theme. This indicates that
investors shouldn’t view the risks and opportunities associated
with sustainable investing themes in isolation, but rather that
they should consider them as part of everything that is
relevant (UBS, 2013).

In addition to the risk of returns, other market risks can include

off-take (demand/price and quantity), financial strength of the
purchaser, and supply risk (availability of resources, resource
costs) (GCPF & DB, 2012).

Source: UBS, 2013.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 29

Development Risks - Team
As with most technology ventures, the technology inventors and company
founders are not necessarily best equipped to grow the company to the size it
needs to be to realize venture capital-type returns. In some cases, the direction
and tactics of those who are best equipped to scale the company do not align
with the founders. The vast majority of founders don’t go the distance in growing
companies up to and through IPOs, as the skillset needed to do so is different from
those needed to start the company (Sangani, 2013).

Investors in most sectors, CE

included, prefer to see Solid track
geographically co-located teams. record
There are several characteristics a
potential investor looks for in a Industry Strong work
management team to grow the connections ethic
company beyond the initial R&D
phase. It is widely viewed as
disadvantageous to install outside Team
Characteristics
members to the team in order to
execute an investment round, but
if these characteristics are not Technical
Integrity
evident in the current team they aptitude
must be added.
Communication
skills

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 30

  Overview
 Clean Energy Investment Current Situation
 Investment Classes and Stages
 Challenges
 Solar PV Market Analysis
 Industry Comparisons
 Investor Insights
 Opportunities
 Conclusion.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 31

U.S. Solar PV Market – Past and Forecasted Installation Trends
 The capacity of solar PV installations in the United States has seen significant growth since 2010, driven by the significant cost reductions
as well as other market and policy drivers. The most significant transformation from 2010 to 2012 was the growth of utility-scale solar as
utility PV installations grew 670%. Solar PV installations increased 76% in 2012 relative to capacity installed in 2011, and 1,769 MW of utility
PV was connected to the grid (57% more than the cumulative total in all previous years) (SEIA/GTM, 2012).
 Annual nameplate capacity of solar PV installations in the United States is expected to continue growing—total installed capacity of
solar PV systems is expected to nearly triple from 2013 to 2016 (SEIA/GTM, 2013), although some note that this may be an optimistic
projection considering BNEF predicts U.S. PV demand will be 5.2 GWs in 2015. Either way, significant growth is expected through 2016.
 Although installations in Q1 2013 declined 45% from Q4 2012, this is still 33% growth over Q1 2012—utilities generally experience booms in
the fourth quarter of each year.
 When the federal ITCreverts to 10% in 2017 for commercial and third-party-owned systems and drops to zero for directly owned
residential systems, 5,115 MW installed in total is projected, which is 44% below the 2016 total but still higher than what is expected for
2013. As developers look to take advantage of the ITC, 2016 will likely be an active year, depressing the 2017 total (SEIA/GTM, 2013).

U.S. Solar PV Installation Forecast, 2011-2017 Key Economic and Policy Solar PV Market Drivers

• Significant cost reductions (discussed in detail on the next

page)
• Federal tax benefits
• ITC/Treasury 1603 grants
• MACRS depreciation
• State policies, regulations, and incentives
• RPS
• Net metering
• Interconnection standards
• A range of financial incentives (rebates, loans, etc.)
• Financial incentives for utilities
• Electricity prices.

Source: SEIA/GTM , 2012

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 32

U.S. Solar PV Market – Declining Costs
 From 2004 to Q3 2008, PV module prices remained approximately flat—around $3.50-$4.00/W. This is largely attributed to German and Spanish tariff
incentives allowing developers to buy at such a price, in addition to a shortage of polysilicon constraining production (preventing competition)
(Bazilian et al., 2012). Thus, the 18 largest quoted solar companies followed by Bloomberg made an average operating margin of 14.6% to 16.3% from
2005 to 2008 (Bazilian et al., 2012).
 In 2011, solar prices dropped so much that deployment increased 54% over the previous year to 28.7 GW—which was 10 times the new build level of
2007 (Bazilian et al., 2012).
 As competition increased, prices fell dramatically from $4.00/W in 2008 to $2.00/W in 2009. Despite this 50% decline, manufacturers still made positive
operating margins because of the reduced costs which were driven by scale and advances in manufacturing processes and improved performance
(Wesoff, 2012).
 As of April 2012, the factory-gate selling price (ex-VAT) of modules from ‘tier 1’ or ‘bankable’ manufacturers was $0.85/W for Chinese multicrystalline
silicon modules and $1.01/W for non-Chinese monocrystalline silicon modules (Bazilian et al., 2012).
 Regardless of module prices, system prices have also steadily declined since 2004 because of better racking systems (IPCC, 2012) and falling BOS costs
(Bony et al., 2012).
 Financing costs have also decreased as understanding and comfort with PV deployment risk have improved (NEA et al., 2005; WEF, 2011).

PV Module Experience Curve 1976-2011 Forecast Costs for Utility-Scale, Ground-Mounted PV Projects, 2010-2020
($/W)

Source: SEIA/GTM, 2013

Source: Bloomberg New Energy Finance, 2012

Solar PV Installed Costs by Market Segment, 2011-2012 Average Installed Prices by Market Segment, Q1 2011-Q1 2013

Source: SEIA/GTM, 2012 Source: SEIA/GTM, 2013

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 33

U.S. Solar PV Market – Third-Party Ownership Model
 One dominant ownership model in all sectors for distributed PV installations is third-party ownership, a structure that is most
commonly referred to as a power purchase agreement (PPA) or a lease. Third parties own the systems while consumers
make payments to the owner. Electricity is generated onsite at either the consumer’s home or facility.
 This business model innovation allows consumers to avoid paying the large upfront capital requirements required for a PV
system, and the consumer can experience the benefit of lower energy bills with little to no upfront cost (SEIA, 2012).
 Third-party ownership residential PV systems are an attractive option for homeowners in most state markets. Not surprisingly,
residential leases and PPAs continued to gain momentum in 2012, increasing to more than 50% of all installations in most
major residential markets (SEIA/GTM, 2012).
 However, some markets—California, Arizona, and Massachusetts—are starting to see a slight reversal of this market share
growth as a result of increased PACE financing availability (California), systems being financed via mortgages with the
housing market rebound (Arizona), and regional banks providing direct loans to homeowners to purchase and install solar
systems (Massachusetts) (SEIA/GTM, 2013).

Percentage of New Residential Installations Owned by

Roles of Solar PPA Participants
Third Party in CA, AZ, CO, and MA, Q1 2011-Q1 2013

Source: EPA, 2012 Source: SEIA/GTM, 2013

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 34

U.S. Solar PV Market – The Role of Early-Stage Investing

Solar VC Funding Q2 2013

 In 2008, the cleantech sector
experienced $7.5 billion in 350 deals (all
investment types).
 In Q1 2013, total solar investment
(including all types of investing, ranging
from angel to VC to private equity) fell
to its lowest level in 5 years (with only 18
investments). Q12013 also marked the
first quarter in the last 5 years with less
than 25 financings (CB Insights, 2013).
 The decline is most commonly attributed
to perception being poisoned following
failures and asset sales.
 Despite the overall slowdown of solar
deals, early-stage deals are continuing.
 Nearly 45% of investments in solar over
the last year have been at the
seed/angel and Series A stages (CB Source: Mercom Capital Group, LLC 2013
Insights, 2013).
 In Q2 2013, solar venture capital
investments increased to $189 million in Solar Funding in 2012
19 deals relative to $126 million in 26
deals the previous quarter (Mercom
Capital Group, 2013).
 Solar third-party finance companies
raised $1.33 billion in disclosed residential
and commercial solar project funds this
quarter, which is a record (Mercome
Capital Group, 2013).

Source: CB Insights 2013

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 35

Solar PV - Lessons Learned
The solar industry’s success can serve as a model for other clean energy sub-sectors.
Transparency and knowledge-sharing will continue to be critical for reducing risks.
Although the clean energy sector may never see investment intensity as it was in 2008,
there is still activity and VCs are looking for new ways to invest (GTM, 2013).

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 36

  Overview
 Clean Energy Investment Current Situation
 Investment Classes and Stages
 Challenges
 Solar PV Market Analysis
 Industry Comparisons
 Investor Insights
 Opportunities
 Conclusion.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 37

Hype Cycle
Technology Trigger
Developed by Gartner Research, the Hype Cycle - Technology breakthrough kicks things off
- Early proof of concept
categorizes the five key phases of a technology or - Media interest triggers publicity
industry’s life cycle. This methodology offers a - No tangible product or proven viability.
graphical representation of how development will
evolve over time, and allow for stakeholders to Peak of Inflated Expectations
- Publicity produces success stories
incorporate the information into risk strategy. - Investments flood the space
- Some companies succeed, many do not.

Trough of Disillusionment
- Interest wanes as investments fail to deliver
- Companies shake out or fail
- Investment continues if the survivors improve products.

Slope of Enlightenment
- The technology/industry becomes more widely
understood
- Second- and third-generation products appear
- More projects are funded, but not 100% participation.

Plateau of Productivity
- Mainstream adoption
- Criteria for assessing viability are more clearly defined
- Market applicability and relevance pay off.
Source: Gartner

Contributing to the peak of inflated expectations of the Hype Cycle is the media attention devoted to specific subsectors.
The amount of media a subsector receives isn’t indicative of investor activity. In 2012 energy efficiency had approximately
the same amount of media attention, but triple the number of VC investment deals (Dow Jones, 2013). This discrepancy
paints a picture of the CE landscape that might not be accurate to the uninformed investor.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 38

Hype Cycle Comparison
CE is being compared by early-stage investors to other more recent industries. The returns and
investment horizons of these fundamentally different industries can’t be compared favorably.
Firms were able to invest in IT companies and expect a 10X return on investment (ROI) within a
few years. These metrics don’t exist for most CE companies, as their capital requirements and
development horizons are fundamentally different from dotcom companies (Malone, 2013). As
valuation increased with hype, a larger amount of under-qualified investors flooded the market
with capital, thereby contributing to over-valuations, subsequent down-rounds, and eventually,
a significantly more bleak fundraising environment.

Hype Cycle for Information Technology Hype Cycle for Clean Energy

Source: Gartner

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 39

Industry Comparison: Pharmaceuticals

Clean
Pharma
Energy

Clear, definable, and bankable Quantifying the intangible benefits

valuations at various stages of
development (patent, lab tests, FDA
trials, etc.)
Clear identification of (and
competition between) funding
agencies (corporations and
foundations) to fund development
along commercialization pathway
Previous success (e.g. Lipitor)—top
ten commercial drugs do between
$4 and $15 billion in annual sales
High-tech of a clean energy project for
valuation purposes is still
undefined and remains a
High costs challenge
Long time from As demonstrated, funding and
financing mechanisms for clean
prototype to energy are complex and
market inconsistent across sectors and
markets
Many layers of IP While there have been successes,
the industry maintains a relatively
negative reputation because of
large failures that were covered
extensively in the media.

Lesson Learned: Clear, definable, and bankable valuations are critical for reducing risk,
especially for long-term, capital-intensive projects; proven successes help reduce risk
perception.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 40

Industry Comparison: Pharmaceuticals

• The current state of cleantech can be compared to the biomedical and

pharmaceutical industry of the late 1990s and early 2000s.

• During this era, it was quite reasonable for companies to raise significant amounts
of capital with a firm IP position and demonstration that the drug or device
resulting from the IP was effective.

• Quickly it became clear that even with defensible IP, and an effective product, a
company could still fail to become profitable without a clear reimbursement
strategy.

• Questions arose. It wasn’t only who would use the device or drug, but who would
pay for it. Medicaid? Insurance? Local government programs? Out of pocket?

• Biomedical companies showed that, without a clearly defined reimbursement

pathway, a technology based business could have significant trouble scaling or
raising future funding rounds.

Lesson Learned: To be successful in 2013, cleantech companies no longer need just exciting
technology, defensible IP, and a compelling value proposition. Successful companies need to
have a clear path to a reasonably large addressable market from the outset of fundraising.

Clean Energy Finance–Challenges and Opportunities of Early-Stage Energy Investing – Executive Summary 41
Industry Comparison: Chemicals
The Energy Industry Compares Accurately to The Chemical Industry

Lessons Learned:

Commodities
with a global
 Providing educational opportunities and
marketplace access to information for all stakeholders,
Strong including consumers, workers, government
Compelling
stories with
incumbent
industry that is
representatives, and investors, increases
clear market
value receive
not transparency and enhances market
incentivized to
investment
take risks confidence.
Energy  Effectively communicating the benefits of
+ such market development, and finding
Chemicals ways to appropriately quantify those
benefits, will drive investment.
Subsidies Difficult to
can’t drive the quantify green  In both industries, green alternatives were
system
indefinitely
value to the
end consumer
promoted through appropriate
regulations and supporting policies (PERI,
Extremely 2011). Subsidies and financial incentives
high capital
costs to build can help promote initial market entry, but
pilot projects
they will not drive the system indefinitely.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 42

  Overview
 Clean Energy Investment Current Situation
 Investment Classes and Stages
 Challenges
 Solar PV Market Analysis
 Industry Comparisons
 Investor Insights
 Opportunities
 Conclusion.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 43

 Investor Insights
Over the course of one month (July/August 2013), interviews were conducted in person and
via telephone with various early-stage CE investment participants, with the purpose of
gathering commentary on the current investing realities and opportunities for increasing
investment in the sector. Investor classes ranged from the initial sources of seed capital to the
entrance of public markets. “Investor Insights” and their respective topics are listed in the
following pages.

Corporate VCs & Strategics

Venture Capital
• Saint Gobain
Angel Investors • Kholsa Ventures
• IBM
• Impact Angel Group • Kleiner Perkins Caufield
• DOW
• King Hill Capital & Byers
• BASF
• Venrock
• Siemens
Family Offices and Advisors • DBL Investors
• Delta
• New Island Capital • Sail Capital Partners
• Elan Management • Southern Cross Venture
Private Equity
• Prime Fund Partners
• Hudson Clean Energy
• CalCEF Clean Energy
Partners
Governmental Angel Fund
• IMPAX Asset
Organizations • Renewable Tech
Management
• UNEP Ventures
• NEA
• United States • Aravaipa Ventures
• Greetch Capital Advisors
Department of Defense • Lux Capital
• Hamilton Clark
• Nth Power
Sustainable Capital

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 44

Investor Insights – Development Risks - Technology

Unlike other sectors, energy must work 99.99% of the time. The end user expects the
lights to come on when he/she flips the switch. It is a great burden that innovative CE
technologies must overcome. Once reliability can be established, the sector can
compete with fossil fuels and nuclear. What is important is for technology developers to
learn from mistakes, including others than have preceded them. Developers and
investors must understand the horizon needed to develop tech in this space.

Winning technologies aren’t incremental innovations. Revolutionary ideas that challenge

existing processes are what attract investment.

“Even if you don’t reach your goal as quickly as hoped for, there is always something to
learn and value in what’s been done.”

“Investors should look for technologies that will have a radical effect on the world. If you
only number crunch and look for safe bets, you’re missing out on the revolutionary
opportunities. Some investments simply have an unknowable upside.”

“IP is everything. If you can’t protect that you don’t have a leg to stand on.”

“Clean energy has a problem with expressing the tangibility of green electron to the end
user. Quantifying the environmental and social values of clean energy technologies will
motivate demand and innovation.”

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 45

Investor Insights – Development Risks - Market
With the rise of clean energy investment in the mid-2000s, there was a “feel good”
attitude of investing in promising environmental and socially conscious technologies.
When these investments didn’t pan out similarly to earlier sectors such as IT, the green
premium connotation was lost. There may even be a clean “discount”. CE must now
compete with other sectors on return expectations, but also reassure investors of their
capacity to commercialize technologies, all while dealing with external factors such as
competing energy commodities and varying government support.

However, energy has an enormous global market, and the boom/bust cycle has
repeated itself many times. Oil and gas has already been up and down the curve in
1985 and 1999.

Furthermore, given the long development cycle of CE technologies, most past

investments have yet to see their exit strategy come to fruition. Over the coming years
we will see what has worked and what hasn’t. With that wisdom the sector will progress.

“Energy always comes back, and so will clean energy. If it shows value it will make money.”

“Don’t underestimate the rate of sales adoption. It always takes more capital than you think it
will.”
Put your quotes down here.

“The market responds to sound economics. Compelling stories will get investment.”

“There is a misconception that clean energy is dead. That VC is pulling out. There’s no way
that’s true. It’s a core part of industry growth across all sectors. More and more new products
are coming onto the market, just maybe not defined as clean energy.”

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 46

Investor Insights – Development Risks - Team
Finding the right team to commercialize an innovative technology is the most difficult
part of development. A mediocre team can run a good idea into the ground, but a great
team will find a way to make a concept succeed. There is a consensus that there is an
abundance of promising technologies, but a disconnect with the talent available to bring
them to market. Investors will walk away if they question the dedication or credibility of
the team, or if there is litigation among stakeholders or customers.

Investors prefer to get involved when there is more than one founder. Multiple founders
bring varied expertise, as well as an attitude of compromise. In CE it is very important to
have industry expertise. The incumbents are very powerful. Knowing how to manage the
landscape is tantamount.

“We run away from CEOs with big egos. It’s a tough transition of running a company
versus being in the lab.”

“Bad behavior or questionable integrity of the team during due diligence is a reason to
walk away.”

“Management with energy industry expertise is invaluable. But talent is just as

important.”

“Team members with a track record are important, but they also need to have passion.”

“The triple bottom line is starting to attract top talent from other industries.”

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 47

Investor Insights – Industry Comparisons
Many CE investors came from the IT world, expecting similar returns and exit strategies.
However, CE is fundamentally different from IT. Whereas an innovative software platform or
device could be developed within a few years (and in some cases months) for millions or even
hundreds of thousands of dollars, CE technologies can take more than a decade to develop
and require millions in investment at multiple stages of development: proof of concept,
prototype, pilot project, field trial, demonstration project, first commercial project, etc.

Additionally, many of those investors within the IT industry didn’t understand the fundamentals of
the energy industry: incumbent players, energy being a commodity under government
regulation, etc. When considering customers, IT is mostly B2C, whereas CE is primarily B2B. The
utility ultimately sells electrons to individuals and businesses, but the sale of a CE technology
company is made with the utility, with a long associated sales cycle.

CE compares more favorably to the chemical and biotech/pharma industries: long

development cycles, strict government regulations, and strong incumbent players.

“In the dot.com days, if you had $10m you could give 10 companies $1m each, and expect two or three
to hit. With clean energy it’s $10 to $20m just to get a prototype, and then another $30m or more to get
to a pilot project. A full demonstration could be in the hundreds of millions.”

“The VC world is encumbered by expectations of returns that don’t like large-scale projects.”

“There’s been a disconnect between hard tech and soft tech. Hard tech can’t be developed with 10 year
LPs.”

“It’s still relatively early in the CE continuum. In a few years we’ll see more opportunities enter the space.”

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 48

Investor Insights – Opportunities – Government Policy

Governmental policies need to complement each other, and provide a clear statement
of objectives as well as a defined horizon. Additionally, state initiatives should be
coordinated with those of the federal government. Energy is a global commodity, but
differences in state policies will increase risk and force uncertainty into demand.

Government should stay away from picking winners and losers. It should make it easy for
a vetted technology coming from a university or lab, or with existing seed money, to get
a second round of financing to bridge the first development gap.

“The proper policies can bridge the market to bankability.”

“To be effective policy must be prudent and timely.”

“Markets are regional, but influential policies are set by states. Coordinated state
policies, especially in adjoining states, would do much to increase market
development.”

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 49

Investor Insights – Opportunities - Partnerships

Partnerships allow for energy ventures to de-risk development without losing economic
potential. Investors at all stages considered strategic partnerships an instrumental part of
CE progress, without which they would consider not investing in a company.
Government partners help in the initial stages, in de-risking early stage development.
Large corporate partners are essential in later stages of development, with industry
wisdom, supply chain expertise, and most importantly, an existing customer base.

“It’s very important for a startup to understand the culture aspect of a partnership.
Misaligned values can derail even the most promising technology.”

“Few startup companies fail because the tech didn’t work. Usually it’s because the sales
cycle wasn’t understood and they ran out of money, or the regulatory and tax process
can’t be navigated. This is where partnerships really add value.”

“Innovators are usually clueless. They have no idea about commercialization costs or
issues in the supply chain.”

“Clean Energy 2.0 will be based upon strong partnerships between innovative companies
and visionary incumbents.”

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 50

Investor Insights – Opportunities – Financing Mechanisms
Developed decades ago, the current regulatory framework is not set up to take
advantage of current investing realities. There are millions of unaccredited investors who
are willing but don’t have the mechanism to invest in promising CE technologies.
Crowdsourcing offers the ability for the average citizen to get involved, but SEC rules
must be changed. Additionally, SEC Rule 506, allowing the solicitation of investors, would
allow companies seeking investment to pitch to a larger audience.

Significant opportunities are available with the philanthropic organizations/investors.

Billions of charitable capital has been sitting on the sidelines, unable to navigate the IRS
framework. Changing tax terminology to allow CE as a charitable effort (i.e., as was
done for vaccines) would unleash billions in investment.

Mechanisms such as efficacy insurance and warranties could improve the bankability of
technologies and projects.

“Philanthropic money can be the game changer. We need to create a mechanism by

which a 501c3 can make a profit through environmentally beneficial risk taking.”

“10 year terms are round pegs in square holes. We need innovative mechanisms.”

“An extra 2 years crashes the IRR for an LP. Venture capital funds need to be setup for a
10+ year life cycle. Clean energy investing will require a recalibration by investor
stakeholders.”

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 51

  Overview
 Clean Energy Investment Current Situation
 Investment Classes and Stages
 Challenges
 Solar PV Market Analysis
 Industry Comparisons
 Investor Insights
 Opportunities
 Conclusion.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 52

Opportunities – Government Policy
Contrary to undermining innovation, government policies can stimulate innovation. The various mechanisms
should complement each other, be aligned with the public interest, and lead to mature markets that ultimately
don’t need the policy assistance and therefore become more politically sustainable (CPI, 2011).

A wave of new strategies has started to appear in the United States to drive down the cost of capital.
Developers are turning to publicly-traded “yield cos,” synthetic MLPs, self-help MLPs, REITs, foreign asset income
trusts, and securitizations as new financing tools or exit strategies to raise capital around operating projects
(Chadbourne and Parke LLP, 2013).

Policy Mechanisms Should…

Be “loud, long, and legal” Incentivize market demand

(Hamilton, 2009) (US PREF, 2010)

Loud Incentivize
• Real Estate Investment Trusts (REITs)
• Master Limited Partnerships (MLPs)
Clearly improve the Indirectly • Property Assessed Clean Energy(PACE)
• Income Trusts and Securitizations.
economic bankability of
projects or technologies

Incentivize • Investment Tax Credit (ITC)

• Production Tax Credits (PTC)
Directly • Feed-in Tariffs (FiTs).

Legal Long
Confidence in the
government’s ability to
Duration should Government • Purchase clean energy technology and
coincide with the
ensure compliance financing horizons. as a components for use on government
property and facilities.
and due diligence Consumer

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 53

Opportunities – Partnerships
Considering the market and technological challenges that CE investors face, partnerships
frequently are attractive strategies as they allow for risk-sharing and the opportunity to leverage
combined resources. Potential partners for collaboration include universities and national labs,
government agencies, and corporate strategic partners.

Universities and National

Labs
- Innovative hubs that can de-risk technology
development.
Government Partners
- Capitalize on technology transfer capabilities
via mechanisms by which private industry can Department of Defense Department of Energy
license or purchase academic or lab IP. - Largest single user of energy - Continue or re-establish
in the United States. agency programs.
- Quantifies value beyond cost ARPA-E  formed in 2007 via
the American Recovery and
(security, reliability, resiliency).
- Congressional mandates (i.e., Reinvestment Act and has
must meet a 25% target of total funded over 275 projects for
Corporate Strategic Partners facility energy use from nearly $1 billion (DOE, 2013).
renewable sources by 2025. DOE Section 1705 loan
- Ability to handle a longer investment horizon. (NDAA, 2010) program  $34B and more
- SERDP and ESTCP programs than 60,000 jobs created
- Capital and revenue streams to make large between 2005 and 2012.
capital investments. promote partnerships to
develop innovative, cost, (US DOE LPO, 2013)
- Industry know-how: supply chain, effective, and sustainable
manufacturing, customer base, industry track solutions.
record.
- Low cost scaling and path to market.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 54

Opportunities – Financing Mechanisms
Cost-effective clean energy will require the use of a broad range of financing tools, with roles across many
aspects of the technology lifecycle. In particular, soliciting early-stage financing is especially challenging for
clean energy companies because of inherent challenges, including costs and access to potential investors.
However, proposed solutions such as crowdfunding, investor networks, and matchmaking could direct angel
investors into clean energy—an investor segment with more than 300,000 angel investors that represent $22.5
billion in investments in 2012 (James, 2013). There are also opportunities to unleash the billions available in
philanthropic funds which, so far, has largely been sitting on the sidelines of clean energy investing.

Program • Change IRS rules to allow clean energy as a charitable purpose.

Related • Allow tax exempt organizations to make investments in for-profit enterprises.
Investments • Over $600bn available in private foundations and family offices.

• Match government funds to private investment.

Government • Keep the government from picking winners and losers.
Loans + Grants • Expedited process, with action in weeks, not months or years.
• Government input should not exceed $50m per investment.

• New SEC rules to allow non-accredited investors to participate.

• Offers opportunities to a wider pool of investors.
Crowdfunding • Limited to raising $1m per year per start-up company.
• Increases community participation and communication on CE benefits.

• Allows a company to sell securities to an unlimited number of accredited investors and raise
SEC Rule 506 an unlimited amount of funds.
• Additionally can sell to sophisticated non-accredited investors .
• Financial statement requirements.

• Mitigate the risks of early-stage investments.

Efficacy Insurance • Manage development risk on a public market.
• Roadmap to follow from preceding industries .

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 55

 Conclusion
The are numerous challenges to the progress of the clean energy sector,
including fluctuating economic conditions, government policy
uncertainty, and various developmental risks.
However, opportunities exist for investors with the expertise and
investment strategy to take advantage of market conditions and
technological innovation.
Appropriate government policies aligned with innovative business
models and financing mechanisms will allow investors to realize
attractive risk-adjusted, long-term financial returns.

Strong partnerships between investors, start-up companies with

innovative technologies, and the incumbent industry participants will
allow all stakeholders to reap the rewards of a clean energy future.

Clean Energy Finance – Challenges and Opportunities of Early-Stage Energy Investing 56

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